1. Field of the Invention
The present invention generally relates to systems, methods, and computer program products for optimizing investments, and more particularly to systems, methods, and computer program products for prioritizing and choosing investments.
2. Related Art
A large fraction of the activities of a typical organization are discretionary activities designed to increase the organization's future profits. Commonly, such activities receive investment funding collectively, without being examined on their individual merits. In conventional budgeting processes, financial resources are budgeted to divisions of an organization, subunits of the organization, specific product lines, or individual projects within the organization (collectively referred to as “business units”) based on past activities. The resulting contest for funding can distort the behavior of business units, encouraging them to maximize their own performances at the possible expense of the overall organization.
Typically, to allocate funding for such activities, decision-makers within an organization draw up budgets on a regularly scheduled basis. Budgeting is an important event in an organization. First, a business unit may prosper if it gets enough funding or wither if it does not. Second, because such funding is desirable, business units compete for it, changing their activities in the hope of attracting more funding. Thus, the rules by which an organization's budgets are allocated can strongly affect how business units operate.
In many organizations, the budgeting process is ineffective and possibly even counter-productive. At the beginning of each budget period, a decision-maker evaluates the overall performance of a business unit. The decision-maker may then increase or decrease the budget of the business unit for the upcoming period. The business unit's previous budget, to which the decision-maker makes adjustments, depends on the history and results of such decisions over earlier budget periods. Thus, as a general matter, business units receive investment funding based on a historical allocation process related to their past performances. As a result, the typical process encourages business units to maximize their own performances.
Budgets determined in this way bear no direct relation to how much the business units contribute to the performance of organization as a whole. Often, it is difficult even to measure their contributions. Because different business units describe and assess their investments differently, they usually cannot be compared. Further, the typical budgeting process does not include a detailed examination of the performance and impact of each investment by a business unit. Rather, each business unit is judged simply by its overall performance.
Also, such budgets typically do not reflect how much funding business units actually need for their planned activities. Business units will receive more funding in future budgets only if their performances appear to justify their current budgets. Therefore, business units will commonly expand their activities to use however much funding they have been given. They do this with little consideration for how their activities will affect the whole organization. In addition, they can receive more funding whether or not they have made adequate plans for the next budget. Because of this process, organizations often fund business units not because of how their future activities will increase profit, but because of how successful their past activities have been.
Thus, conventional budgeting processes do not ensure that investments are planned to increase the profit of a whole organization. Rather, they encourage business units of the organization to maximize their own past performances. Given the foregoing, what are needed are a system, method, and computer program product for optimizing investments across an organization by comparing predictions of the performances of each of the investments within an organization.